Prioritizing the Best Trade Ideas

It only takes a handful of good ideas to make money with a trend-following or position trading style. As I've discussed before, only a small minority of stocks are responsible for the market's gains. And yet since there are about 10,000 stocks on US and Canadian exchanges, that small percent adds up to over 500 potential stocks -- way more than the 10(ish) I need. So the challenge I've faced is this: how do I prioritize the hundreds of all-time highs to find my next trade?

For the most-part I've done this prioritization manually, by looking through hundreds of charts, looking for relative strength, watching sectors, reading about companies, and so on. Nevertheless I am always trying to find a better way. A system that takes less time and still delivers uncompromized results. To that end I've added a new stock screen called "The Short List", which is my attempt to focus on the best stocks. It is a work in progress to be sure, and I welcome your suggestions. Granted one person's trash is another's treasure, as they say, so it won't be possible to develop a perfect screen. But I think improvement is a goal worth striving for.

A benefit of trying to do this quantitatively is it forces me to distill the essential traits I look for in a stock into something that can be entered into a computer program. Computer programs are great for squashing ideas that are not crystal clear so this is a good process for self-learning.

Here are the characteristics that I included in the first version of the Short List screen:

• Share Turnover (inspired by Derek Hernquist)
• Calmar Ratio (mainly focused on 1 year result, but stellar 4 year results are also considered)
• Dollar Value Traded (using different cutoffs for US vs Canadian stocks)
• Earnings Date (any stock reporting next week is automatically included in the list)
• Sorted by the stock's age (new ideas come first)

In future versions I'd like to incorporate unusual volume into the screen. I am also considering folding my "top fundamentals" and "top institutional transactions" summaries into the Short List.

Looking through this week's Short List I'm pleased to see quite a few stocks that I own or have been stalking. This suggests it has been a decent first attempt. Here are some of the names:

• BSFT (BroadSoft, Inc. | NASDAQ)
• CSU (Constellation Software | TSX)
• JAZZ (Jazz Pharmaceuticals | NASDAQ)
• PAY (Verifone Systems, Inc. | NYSE)
• TPX (Tempur Pedic International | NYSE)
• GLNG (Golar LNG Limited | NASDAQ)
• NA (National Bank of Canada | TSX)

There you have it. It's not much but it's a start. The challenge will be finding the 'sweet spot' between being too inclusive (and having to look through more charts) vs. being too exclusive (and missing great opportunities).

There's only one reason you own a stock in your portfolio, and that is to make as much money as possible. - Dan Zanger

Related Posts

• The Short List
• Full All-Time High List
• Focus on the Best Stocks
• Dan Zanger's Trading Advice
• Why all-time highs outperform
• Van Tharp on Stalking Your Next Trade